It has been common practice for an owner-manager of an
incorporated business to "bonus-down" the active
taxable income of his/her company to the small business deduction
(SBD) limit. If the owner-manager required additional personal
funds, the funds were often withdrawn from the company by way of a
dividend. For many years, this has been a routine strategy since
the high corporate tax rate on income above the SBD limit resulted
in a large amount of overall tax being levied on an eventual
distribution of these funds as a dividend to the owner-manager. By
using this strategy, the company was able to minimize the rate of
corporate tax that was applied to its earnings, and the
owner-manager was able to maximize his/her after-tax income that
was drawn from the corporation.
Going forward, this strategy may no longer be routine. In
Ontario, corporate tax rates for active income both at and above
the SBD limit have recently decreased, and the rate for active
income above the SBD limit is scheduled to continue to decrease
through 2013. Presently, for income above the SBD limit, the
overall tax rate in Ontario (corporate and personal) applied on
corporate earnings withdrawn as a dividend is now only marginally
higher than the overall tax rate applied on a bonus withdrawn from
As corporate tax rates decrease, the tax deferral opportunity
increases for corporate earnings that are not distributed as a
bonus to the owner-manager. The deferral available in Ontario on
taxable income above the SBD limit for 2011 is approximately 18%
(growing to approximately 21% in 2014). Generally, if an
owner-manager does not require personal cash from the company, the
company should not automatically "bonus-down". As
a result, the corporate earnings will benefit from the growing tax
deferral. If an owner-manager requires personal cash from the
company in the future, a bonus (or a dividend) may be paid at that
By 2013 in Ontario, the overall tax rate applied on corporate
earnings withdrawn as a dividend will be marginally lower than the
overall tax rate applied on a bonus withdrawn from the corporation.
At that time, it is expected that an owner-manager will compensate
themselves through dividends (consideration should be given to pay
a salary to maximize RRSP contributions or to utilize child care
There are various points to consider from the company's
perspective if it ceases to use a "bonus-down"
being mindful of maintaining the small business corporation
status as funds build up in the corporation,
reviewing the cash flow impact as a result of increased tax
determining how the company's scientific research and
experimental development expenditure limit will be affected.
If an owner-manager requires personal cash and must draw funds
from company, the following tax-free distributions may be
considered, if available:
repaying shareholder loans,
returning share capital where possible,
paying dividends from the company's capital dividend
creating a shareholder loan by transferring personally held
assets to the company on a tax-deferred basis.
It is important to keep in mind that no "one size fits
all" approach exists when determining the optimal
owner-manager remuneration package. Each owner-manager's
specific needs and objectives must be carefully considered when
determining an overall compensation package.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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